There are many high-quality dividend stocks in the financial sector. For example, approximately 11% of the Dividend Aristocrats list comes from the financial sector. This article will highlight the three best bank stocks in 2022 that promise the highest upside potential over the coming years. 

Photo by Etienne Martin on Unsplash

Banks, overall, look like an attractive choice for the current year. This is because banks often trade at relatively inexpensive valuations while also benefiting from rising interest rates. Next, many names in this industry do offer dividend yields that are significantly higher than the broad market’s meager 1.3% average dividend yield.

Banks have a substantial macro tailwind looming, with the US Federal Reserve likely hiking rates at least once this year and presumably several times in 2022 and beyond.

Ally Financial

Ally Financial Inc. (ALLY) is a financial services company that offers auto financing, insurance, mortgage financing, and many more services. Ally has existed for more than 100 years but has experienced rapid growth in recent years. The company expanded into new business areas and has gained many new customers with a digital-focused approach, especially among younger consumers.

Ally Financial’s earnings-per-share growth in recent years rested on several pillars. First, ongoing revenue gains contributed to rising profits, but Ally Financial also shrank its share count continuously via share repurchases. This reduction resulted in a bigger portion of company-wide earnings for each share, significantly boosting Ally Financial’s earnings-per-share growth. For example, between 2014 and 2021, the company repurchased around one-third of its shares.

We believe that Ally Financial will continue to grow its earnings-per-share at an attractive pace going forward. New products such as Ally Invest and Ally Home will promote revenue growth, while the substantial cash flows from its auto financing and insurance operations can be used for buybacks. In addition, Ally has just announced a new $2 billion buyback program, which is large enough to reduce the share count by more than 10% at current prices.

On top of that, Ally Financial should also benefit from earningsmultiple expansion. Shares of the company are trading at a relatively inexpensive valuation of just 6X 2021’s net profits. Hence, we believe there is significant upside potential to that valuation. Finally, Ally offers a dividend yield of around 2.3% today. The quarterly dividend has just been hiked by 20% to $0.25 per share from $0.20 per share. We believe that through earnings-per-share growth, multiple expansion, and its dividend, Ally Financial could deliver total returns of more than 10% a year.

Source: Portfolio Insight

Calvin B. Taylor Bankshares

The second stock of the three best banks stocks in 2022 is Calvin B. Taylor Bankshares (TYCB), a small community bank with a market capitalization in the $100 million range. The company nevertheless has a long history dating back to the 19^th century, and TYCB is positioned to deliver attractive returns going forward.

The bank is active in Eastern coastal markets. It primarily offers loans, deposits, and ancillary services to its customers via physical locations and digital channels. TYCB was less volatile during the Great Recession than many of its peers when the bank remained highly profitable despite experiencing some earnings declines. The bank’s asset quality and returns on capital are at an above-average level as well, suggesting TYCB is a solid quality pick among bank names.

TYCB has grown its assets at an attractive pace in the past, including during the COVID-19 pandemic. Some additional growth in its loan portfolio should occur in the coming years, but the bank will see even more significant tailwinds from rising interest rates. With the Fed likely hiking rates in 2022 and beyond, TYCB should be able to expand its already attractive net interest margins further. Calvin B. Taylor Bankshares has also been buying back its shares at a rate of around 2% – 3% a year, providing some additional boost to the company’s earnings-per-share growth rate.

TYCB is trading at an inexpensive valuation of just 11X net profits. Moreover, we believe that there is potential for earnings multiple expansion based on the company’s past valuation and its above-average quality compared to many other banks.

Shares could, we believe, reasonably trade at 12X – 13X net profit in the long run, which will allow for share price gains at a higher rate compared to the forecasted earnings-per-share growth rate of 5% – 7%. When we also account for TYCB’s dividend, which is approximately 3.2% today, we see a reasonable path to annual returns of 10% – 12% a year.

Source: StockRover

Morgan Stanley

Morgan Stanley (MS) is one of the largest investment banks in the world. The bank is the last one of the three best banks stock in 2022. Its services include, on top of traditional investment banking, asset management, and other ancillary services.

Morgan Stanley has been expanding its operations through acquisitions, which includes the E-Trade and Eaton Vance takeovers during the last couple of years. Those acquisitions will likely continue to positively impact the company’s growth rate, and some additional synergies could still be captured.

With the build-out of these businesses, Morgan Stanley also has the chance to see its revenue become less cyclical over the years. Asset management, for example, allows for a more consistent revenue stream than underwriting and other investment banking activities that are more dependent on market volatility.  

Morgan Stanley is not among the largest consumer banks, but it will nevertheless also see some tailwinds from interest rates potentially trending up over the coming years. Combined with ambitious buybacks, these factors should lead to attractive earnings-per-share growth. Adjusted for its takeovers, partially paid for via share issuance, Morgan Stanley has reduced its share count by an impressive 20% over the past five years. As a result, we believe that earnings-per-share can rise by up to ~10% a year going forward.

Morgan Stanley is not as inexpensive as Ally Financial and TYCB, as shares are currently trading at 13X 2021’s net profit. Multiple expansion is thus, we believe, not a meaningful driver for shareholders’ total returns. Still, with a compelling earnings-per-share growth outlook and thanks to a dividend yield close to 3%, Morgan Stanley should be able to deliver double-digit returns going forward.

Source: Portfolio Insight

The Bottom Line for the 3 Best Bank Stocks for 2022

Many financial stocks look attractive in 2022 based on their promising growth outlook, reasonable valuations, and safe dividends. Safe and reliable dividends are essential but looking at a company’s total return outlook makes sense as well, even for income investors. ALLY, TYCB, and MS are our three best banks stocks in 2022 due to above-average dividend yields, safe payouts, and high expected returns.